Published on 8/01/2018 4:28:12 PM | Source: Emkay Global Financial Services Ltd

Auto and Auto Ancillaries - Uptrend to persist: Expect buoyant revenue and earnings performance - Emkay

* Revenue to surge in Q3FY18: Revenue growth is expected to be robust, primarily due to strong rural demand, higher realizations and low base of demonetization. Most automotive manufacturers are likely to report double-digit revenue growth, with best performers being Ashok Leyland (+49% yoy), Bajaj Auto (+21% yoy), Eicher Motors (+20% yoy) and TVS Motor (+20% yoy). Even Auto Ancillaries would mirror this strong revenue performance. Overall, we forecast revenue for companies under our coverage to grow by 16% yoy.

* Margins to contract sequentially: EBITDA margins are likely to expand yoy due to operating leverage benefits. However, margins are estimated to contract sequentially, mainly led by lower scale, increase in discounts/incentives and higher RM costs. Commodity price movement (price comparison at start of the quarter) was adverse sequentially, with an increase in aluminum, steel, rubber and lead prices. A few companies that are likely to witness better margins qoq are Exide Industries (+120bps qoq), Apollo Tyres (+80bps qoq) and Ashok Leyland (+40bps qoq). Overall, we forecast EBITDA margins for companies under our coverage to contract by 80bps qoq (+100bps yoy).

* Outlook: We believe that the Indian automobile industry is in a sweet spot on the back of a cyclical recovery across segments. Rural India is turning out to be the growth frontier for the automobile industry, as near-normal monsoon for 2 years has bolstered consumer confidence. Going forward, we believe that the stage is set for strong growth in automobile demand due to: 1) increase in Govt capital spending and focus on rural economy, 2) near normal monsoon and higher disposable income in view of 7th Pay Commission awards and 3) new launches. Two Wheelers, Tractors and Passenger Vehicles segments are likely to witness strong double-digit volume growth over FY17-19E, while Medium & Heavy Commercial Vehicles volume growth would see a turn around.

* Top picks: FY18/FY19 would be good years for beneficiaries of rural demand such as Hero MotoCorp, M&M and Escorts. Also, Ashok Leyland is likely to be the best proxy for MHCV sales upcycle. Meanwhile, Tata Motors would be our dark horse, as currency worries subside and volume growth momentum remains intact.

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